Examine should the firm purchase the new machine

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Question: Coiner Clothes is contemplating the replacement of one of its knitting machines with a newer, and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated by $120,000 per year, using the straight-line method. The new machine has a purchase price of $1,175,000, an estimated useful life MACRS class life of 5 years, and an estimated salvage value of $145,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The new machines is expected to save on electric power usage, labor and repair costs, as well as to reduce the number of defective articles of clothing. In total, an annual savings of $255,000 will be realized if the new machine is installed. The company's marginal tax rate is 35% and it has a wacc of 12%. Should the firm purchase the new machine? Clearly support your answer.

Reference no: EM131956247

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